It is understood the financial regulator and the Treasury are set to say that a complex tax issue which prevented small-scale investors putting their money into hedge funds has been solved, enabling a full regulatory regime for retail investors to be drafted.

The FSA has been studying the possibility of allowing small investors access to hedge funds since 2002.

Last year, it released a consultation paper on the establishment of funds of alternative investment funds, which are expected to provide vehicles for retail investors.

But the process has been hampered by the tax treatment of these vehicles because almost all hedge funds are listed offshore and the Treasury would not allow access to them without ensuring profits made by investors remain fully taxable.

The FSA and the Treasury were putting the finishing touches to the agreement

late last night, but an announcement could be delayed until next week.